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Why Invest in Philippine Real Estate

May 08, 2013 Investing in Real Estate

April 2013, the Philippines got its first long-coveted investment-grade rating from Fitch, which gave the country a “BBB–” with stable outlook. An upgrade from Standard & Poor’s followed a month later and Moody’s is expected to do so in late 2013. An investment-grade status opens up a country to more investments that can lead to additional jobs and funds for infrastructure, and help create a sustainable growth.

After the experiencing a major decline in the aftermath of the Asian financial crisis, the Philippine real estate market has never looked back. Although recovery has been slow, nominal prices are back to pre-crisis levels. In recent years, employees of IT-related and BPO companies have boosted demand for rental housing, and this had a ripple effect on the construction, retail and telecommunications sectors, which resulted in property price increasing by 59.3% from 2005 to 2008. Significant economic recovery in 2010 after the global financial crisis is now propelling prices up again.

The Philippines’ real estate market was also cited as one of Asia’s most transparent in Jones Lang LaSalle’s Global Real Estate Transparency Index 2012. The report ranked the country 35th out of 97 markets monitored, ahead of Indonesia, Thailand, and even South Korea.

According to the report, the Philippines, along with Hong Kong, Singapore, and Malaysia, has relatively high transparency scores on market fundamentals, boosted by robust market tracking systems, such as Jones Lang LaSalle’s Real Estate Intelligence Services.

Supply

Fueled by a robust IT-BPO industry and record-high remittance from overseas Filipinos, the Philippine real estate industry is as vibrant as ever. To describe the growth of Manila’s housing market staggering may be an understatement. According to Jones Lang LaSalle (JLL), in 2000 only around 7,000 condominium units were completed. This figure jumped to about 90,000 by the end of 2011, and between 2012 and 2016, approximately 154,000 condominium units are expected to complete.

Data from JLL also show that capital values for mid-end condominium units grew an average of 13% annually between 2004 and 2011 and rents an average of 8% over the same period.

At 24%, Metro Manila’s northern suburb of Quezon City will head the surge of supply expected to be completed in the Philippines. This is followed by Makati at 18%, Mandaluyong at 15%, and the city of Manila itself at 12%. These four cities alone comprise two-thirds of the upcoming supply in Metro Manila.

Demand

According to Claro Cordero, head of research and valuation at JLL Philippines, demand for residential real estate in the Philippine capital is driven mainly by end-users rather than speculative buyers, which cushions the market from a possible formation of a property bubble. In addition, demand is currently supported by low interest rates, a higher value-added tax exemption ceiling and flexible payment terms.

Cordero also added that although property prices are rising, they are not likely to drastically shoot up because of the current intense competition in the market.

Nevertheless, he cautions that a large supply over the next five years will make market positioning and aggressive marketing campaigns crucial for developers if they wish to maintain healthy take-up rates. “As long as the economic environment continues to improve, the property market may be able to sustain growth,” says Cordero.

Another source of demand for Philippine real estate is the influx of expats brought about by the booming IT-BPO industry. According to leasing and estate firm CBRE, expats are making a tiny boom in the country’s residential real estate, particularly in the luxury segment. Indeed many IT-BPO companies are now purchasing or leasing properties for their expat employees, many of which are located in the capital’s business districts.

Rental Yield

Data from Global Property Guide show that the average rental yield for condos in Metro Manila was around 8.72% in October 2011. The highest returns are on units 80 square meters (sqm) or larger, suggesting that an oversupply of smaller condos. In addition, yields are also very high on very large units, around 7.9%. The rise in the Philippine capital’s rental values is attributed to continued confidence to the country’s real estate market, foreign investment and improved infrastructure.

According to Colliers, the average rent of a high-end three-bedroom condo unit in Makati City in the first quarter of 2012 reached $15.74 per sqm per month, up 4.8% from the previous quarter and 17.5% from a year earlier. The average rent in Bonifacio Global City rose by 4.3% quarter-on-quarter over the same period to $16.69 per sqm per month, and that in Rockwell Center by 1.3% to $18.66 per sqm per month.

Capital Values

In 2013, a large volume of available supply is expected to exert a downward pressure on selling prices, especially in the mid-end market. However, the luxury segment is expected to continue to outperform. Capital values of luxury condominiums reached $2,840.18 per sqm in the fourth quarter of 2012, with investment yields estimated at 6.9%.

According to Colliers, the residential market will continue to look strong in 2013 due to the anticipated economic growth and sustained occupational demand from expatriates employed in the IT-BPO industry and remittance from overseas Filipinos. However, as there will be 2,800 new units coming into the market in 2013, prospective growth and prices are expected to slow to 9.5% and 6.2%, respectively.

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